Bookkeeping Tip: Cut Your Capital Gains With Crypto

Here’s a bookkeeping tip for you – you can cut your capital gains taxes with crypto.

Here’s how to cut your capital gain taxes with cryptocurrencies.

Wash Sale Rule:

The Wash-Sale Rule states that if an investment is sold at a loss and then repurchased within 30 days, the initial loss cannot be claimed for tax purposes. To comply with the Wash-Sale Rule, investors must wait at least 31 days before repurchasing the same investment. A good bookkeeper should know this. We do.

Because cryptocurrencies are classified as “property” rather than as securities, the wash-sale rule does not apply if you sell a cryptocurrency holding for a loss and acquire the same cryptocurrency; before or after the loss sale.

You have a garden-variety short-term or long-term capital loss depending on your holding period. No wash-sale rule worries.

This favorable federal income tax treatment is consistent with the long-standing treatment of foreign currency losses.

That’s a good thing because folks who actively trade cryptocurrencies know that prices are volatile. And this volatility gives you two opportunities:

1. profits on the upswings
2. loss harvesting on the downswings

Let’s take a look at the harvesting of losses:

• On day 1, Lionel pays $60,000 for a cryptocurrency.
• On day 50, Lionel sells the cryptocurrency for $40,000. He captures and deducts the $20,000 loss ($60,000 – $40,000) on his tax return.
• On day 52, Lionel buys the same cryptocurrency for $45,000. His tax cost basis is $45,000.
• On day 100, Lionel sells the cryptocurrency for $15,000. He captures and deducts the $30,000 loss ($45,000 – $15,000) on his tax return.
• On day 103, Lionel buys the same cryptocurrency for $25,000.
• On day 365, the cryptocurrency is trading at $85,000. Lionel is happy.

Observations:

• Assuming Lionel had $47,000 in capital gains, Lionel deducted his $50,000 in cryptocurrency capital losses. If he had no capital gains, he had a $3,000 deductible loss and carried the other $47,000 forward to next year.
• On day 365, Lionel has his cryptocurrency, which was his plan on day 1. He thought it would go up in value. It did, from its original $60,000 to $85,000.
• Lionel’s tax basis in the cryptocurrency on day 365 is $25,000.

Here’s what Lionel did:

1. He kept his cryptocurrency.
2. He banked $50,000 in losses.

Be alert. Losses from crypto-related securities, such as Coinbase, can fall under the wash-sale rule because the rule applies to losses from assets classified as securities for federal income tax purposes. For now, cryptocurrencies themselves are not classified as securities for tax purposes. When you choose us for your bookkeeping, we can help you navigate this.

Planning point. If you want to harvest losses, make sure you hold a cryptocurrency and not a security.

Let us take care of your tax and bookkeeping needs, so you can concentrate on what you do best running your business!!! Let’s discuss more in a strategy session. Book Your Free Assessment Here.